Which bitter pill will Turkey swallow to secure its energy future?

Ankara’s political alliances are being upended by new natural gas discoveries and changing dynamics from Russia to the Mediterranean Sea.

Source: Bilfinger Flickr

From the enormous Caspian Sea deposits in Central Asia, natural gas reaches European markets through the Southern Gas Corridor, a group of pipelines crossing Turkey.

Following the fall-out between Russia and the EU, particularly over gas supplied through Ukraine, investment in Turkey has improved its infrastructure and viability as an alternative route. Additionally, Turkey has become increasingly reliant on natural gas imports to meet its own energy needs. However, rising domestic demand, shifting geopolitical opportunities, and new discoveries could force Turkey to reexamine its position.

Growing domestic needs

Turkey’s vulnerability to natural gas supplies results from its infrastructure and dependence on natural gas. Surpassing its use of oil in 2012, Turkey’s reliance on imported natural gas makes it vulnerable to external shocks and uncertainties.

Turkey’s domestic energy requirements make it one of the largest gas markets in Europe and, after China, the second fastest growing consumer of natural gas. Its 2015 consumption was 47.5 billion cubic meters (bcm), but this is expected to grow to 70bcm by the end of the decade. Turkey’s dependence on gas to supply its electricity and energy needs is extremely high compared to other consumers and the world average, illustrating the extent of its reliance.

Although renewable energy sources and coal contribute to electricity needs, Turkey acknowledges that natural gas will continue to play a primary role in meeting its energy needs. Turkey’s declining energy security, currently 20% lower than the OECD average, underscores the urgency of meeting is natural gas needs. With more than half of that gas coming from Russia, Turkey must mend relations with Russia or seek supplemental providers.

With growing domestic demand in danger of not being adequately met and a lack of investment in good alternatives, various LNG opportunities in Qatar and Turkmenistan were pursued in late 2015, however without promising results.

President Erdoğan may have been successful in accelerating the delivery of gas from Azerbaijan’s Shah Deniz II field, however this is not expected to materialize until late 2018, forcing Turkey to reexamine its neighborhood options.

Energy leads to Russian cooperation

In the face of sanctions and continued low oil revenues, Russia is seeking a way to supply European energy demands, bypassing Ukraine. Indeed, the resurrection of the TurkStream project from its shallow grave indicates growing mutual recognition of the need for cooperation between Turkey and Russia.

From a Turkish perspective, Russia has been a reliable gas supplier and turning to them has provided its own political leverage with the West.

Acrimonious relations between Turkey and Russia stem from the shooting-down of a Russian SU-24 bomber in November 2015, which was followed by economic sanctions and embargos, hitting the Turkish tourism sector particularly hard, but also shelving pipeline plans.

Despite these obstacles, Turkey and Russia need each other, if only because no other supplier can supplement the amount of gas Russia provides. Meetings in Moscow and Istanbul have renewed ambitions and the TurkStream project appears to be back on track. However, the political disruption has reminded Turkey how dependent it has become on Russia to meet its energy needs.

Another variable is how gas fields in volatile Iraqi Kurdistan are ultimately developed. Ankara is troubled by Russian overtures to the Kurdish Democratic Union Party (PYD) and bombing campaigns, which have restored territory to Kurdish groups at the expense of Turkish-backed groups.

However, international, rather than national gas companies would likely develop the gas fields and construct the pipelines. At the moment, security and stability is the paramount issue, not territorial control. Both Turkey and Iraqi Kurdistan would benefit from relatively cheap gas and infrastructural developments associated with extraction and pipeline construction. Whether such cooperation is within Ankara’s capacity will be demonstrated by how it progresses with Cyprus and Israel.

Source: Crystol Energy

Small steps towards Israel

The Leviathan gas field off the coast of Israel is one of the largest offshore gas finds in recent years. Estimated to contain between 450-620 billion cubic meters of natural gas, the field exceeds Israel’s domestic demand and could supplement the growing gas needs of Egypt, Lebanon, Jordan, and of course, Turkey.

However, since its discovery in 2010, delays in infrastructure developments and political obstacles have been expensive, causing Israel significant losses in revenue. The sense of urgency is apparent in the royalty offering terms and options introduced before bidding earlier this year.

The next round of offshore energy licensing will take place this month. Israeli ministers are hoping that the bidding will attract a greater number of large companies than the disappointing licensing for the smaller Tanin and Karish fields. Warming of Israeli and Turkish relations signal the countries’ willingness to move forward in exploration and development of the fields, which hadn’t previously been evident.

Israel has already invested two years negotiating with oil and gas companies operating in the country, and the outcome of the November bids will be a reflection of this technical and diplomatic work.

At the 23rd World Energy Congress, Turkish Energy Minister Berat Albayrak met with his Israeli counterpart to discuss exporting Israeli gas to Turkey via a subsea pipeline. The visit was the first by an Israeli minister to Turkey following the vast diplomatic rupture six years ago, when diplomatic missions between the two countries were suspended following the Mavi Marmara incident.

In 2010, an international flotilla, including the ship Mavi Marmara, was boarded by the Israeli military while in international waters en route to Gaza, which was under blockade at the time. Lethal force used against the passengers, some of whom were Turkish, led to a disagreement over the nature of the mission and Israel’s role in Gaza.

In recent months, the Turkish parliament has made overtures to Israel to repair diplomatic ties. Collaboration between energy ministers underlies Israel’s need to develop and export the gas, as well as Turkey’s willingness to overlook political tensions in the interest of geopolitical necessities and its future energy security.

Even smaller steps towards Cyprus

The undeveloped Aphrodite field, 185 kilometers south of Cyprus and 34 km west of the Leviathan field, is relatively smaller, with an estimated 127 bcm of gas. Due to its proximity, similar geopolitical and territorial complexities will affect the development of both fields. An overland pipeline through Syria is too vulnerable, necessitating construction of underwater pipelines, which will cross disputed waters.

The island of Cyprus was divided in the summer of 1974, when Turkish forces invaded northern Cyprus following a Greek-led coup against the government. The Turkish occupied territory, now known as the Turkish Republic of Northern Cyprus, is not recognized internationally as a sovereign country and the Turkish government has refused to acknowledge the Republic of Cyprus as the single government of the island. As a member of the European Union, the Republic of Cyprus has successfully used this dispute as leverage to exclude Turkey.

With gas discoveries in the Mediterranean, Cyprus may now be compelled to cooperate with Turkey however. Logistically, Cyprus lacks the infrastructure to reach an export market. Egypt, which does have processing and distribution infrastructure, has signed several agreements with Cyprus to export the gas via underwater pipeline.

However, the general and vague nature of the agreements and the absence of energy company involvement have prompted some to characterize the move as a stunt to remind Turkey that development of the Aphrodite field wasn’t dependent on Turkish infrastructure.

Although exploration is still in the early phases, the development of the Cypriot field with international companies has prompted optimism. In conjunction with steps towards reunification of Cyprus, some have pointed to the potential advantages of Turkish, Cypriot, and Israeli collaboration for developing the new fields. The three countries would benefit from cooperation, but still have a way to go.

Can Turkey meet its energy demands?

Turkey is facing both geopolitical and logistical challenges to meet growing demand.

Although Turkey’s steps towards reconciliation with Russia have been construed as undermining Turkey’s role in NATO, the truth is Turkey needs both as allies, and badly.

NATO provides necessary defense armament and Turkey has even lobbied privately for a larger NATO presence following the November 2015 incident, though tensions remain high following the attempted coup this past summer. Russia, as Turkey’s primary gas supplier, must be appeased so long as significant and reliable gas suppliers are lacking.

Overtures to Israel and Cyprus are emblematic of Turkey’s desire to broaden its energy suppliers and recognition that overdependence on Russia comes at a cost.

Development and completion of the alternative projects are long-term investments and Turkey will use these various relationships to leverage the best deal. Historically low gas prices create an opportunity to expand its role as a regional gas hub, establish a competitive market and reduce its dependence on Russia, yet Turkey will have to persevere in its diplomatic overtures to achieve its regional goals.